New regulations on energy efficiency 'mired in confusion'

Businesses are confused about and unprepared for the implementation of the Government's Carbon Reduction Commitment (CRC), the energy efficiency scheme which starts tomorrow.

Nearly half of companies surveyed by the power supplier Npower said official advice about the new legislation had been "inadequate". About 49 per cent said they did not understand how to buy the necessary carbon allowances and 44 per cent said they do not know how to forecast their carbon emissions, according to a report published this morning.

The scheme is not new but it has been altered several times since the legislation was passed. There is still considerable confusion about which companies fall under its remit and what they are required to do.

Some 5,000 businesses – between them accounting for about 10 per cent of the UK's harmful carbon dioxide emissions – will form the core of the scheme, with another 25,000 expected to register but unlikely to have to participate fully. Those affected have up to six months from tomorrow to register, and another 12 months to establish the necessary monitoring systems.

The CRC is a variation of a cap-and-trade scheme. All organisations with half-hourly electricity consumption of more than 6,000 megawatt hours are required to submit annual carbon footprint audits and buy carbon permits for the following 12 months. Any surplus permits can be traded and any shortfall bought in the market.

A wide variety of organisations are affected by the scheme, including local authorities, supermarkets and banks. But such a wide remit is part of the problem, because what works for one sector may not make sense for another.

One area of confusion is the so-called "McDonald's Clause", which counts all franchises together as one carbon footprint. The same applies to rivals such as Burger King. But the model is less effective in other areas. In the car retail sector, for example, businesses are unclear as to whether the burden falls on the car maker, the operator or the individual dealership.

Similarly, property companies are unclear whether private finance initiatives such as the Government's Building Schools for the Future programme leave the private builders liable, or the public occupants. There is guidance available from the Environment Agency, which regulates the scheme, but even that is not conclusive.

"The consistent picture is that a lot of organisations feel very unprepared," said Ben Wielgus, the lead CRC adviser at KPMG. "The largest challenge is that there are still some detailed aspects of the scheme that need clarification. The problem that different organisations interpret the guidance from the Government in different ways, and the exact boundaries of who is responsible for what are still subtly unclear."

The CRC does not make money for the Treasury. All the payments are refunded to those taking part six months later, with either a bonus or a deduction depending on the company's position in a league table ranked by reduced power use.

Initially, the amounts at stake are relatively small. An organisation may spend 10 per cent of its utility bill on permits. If ranked in the top half of the table, it stands to make a profit of up to 10 per cent of that stake, and to forfeit an equivalent amount if not. But the CRC is staggered. In the second year, the bonus goes up to 20 per cent, in the third to 30 per cent and so on. Analysis by PricewaterhouseCoopers suggests that the worst performers could be adding nearly 20 per cent to their annual energy costs by 2015.

The effect of a low ranking on a group's reputation is an even greater spur, especially for companies with green credentials to preserve. "The clever bit is the combination of fiscal and reputational incentives," said Chris Tuppen, the head of sustainability at BT. "Fiscal alone would have produced some improvement but the fact that there is a league table is almost as important to a lot of companies."

BT is one of several big companies to have voiced concerns about the CRC. A key criticism is that it takes no account of other green projects, such as wind turbines or electric cars. The Government has compromised, agreeing to include such initiatives in its Carbon Reporting Guidance scheme.

But self-generated green power must still be counted in the CRC– and permits bought for it – so the parameters of the league table must be made clear, according to BT.

"It is incumbent upon the Government, when it publishes the league table, to make it clear that they are representing energy consumption and not an organisation's entire carbon footprint," Mr Tuppen added.

CO2 in numbers

5,000 Organisations that will have to submit to the Government an audit of their carbon footprint and buy permits from March 2011

25,000 Companies that will have to register and measure their carbon footprint but are unlikely to have to pay

6,000 megawatt-hours Maximum electricity consumption for organisations that wish to escape the scheme

10 per cent Estimated cost of CO2 permit, as a percentage of an organisation's utility bill

£12 Initial price, per tonne of CO2, for allowances